Research papers
Marina Azzimonti & Vincenzo Quadrini
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Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in countries that hold its debt, which could justify why a given country may want to bailout another. But why do creditor countries choose to bail out debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that, although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex-post (after a country has defaulted) but also ex-ante (before the country chooses its debt).
Enrique Mendoza & Vincenzo Quadrini
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Abstract: The sharp, secular decline in the world real interest rate of the past thirty years suggests that the observed surge in global demand for financial assets outpaced the growth in the supply. We argue that (a) this phenomenon was driven by faster growth of emerging market economies (EMs) and changes in the financial structure of both emerging and advanced countries, and (b) the low-interest-rate environment made the world economy more vulnerable to financial crises. A two-region model in which financial assets provide productive services and private debt can be defaulted on, predicts that faster growth in EMs and financial structural change cause a sharp rise in demand for financial assets and a drop in the world interest rate. This, in turn, increases financial and macroeconomic instability worldwide.
Cesaire Meh, Vincenzo Quadrini & Yaz Terajima
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Abstract: This paper shows that, when financial contracts are not fully enforceable and firms observe their own nominal sales before the observation of the aggregate nominal price, the optimal financial contract is not fully indexed to inflation. Because of the limited nominal indexation, which is endogenous in the model, unanticipated inflation affects aggregate investment and future economic activity. The macroeconomic volatility induced by price uncertainty, however, is not monotone: it first increases and then decreases with nominal price uncertainty. We also show that the degree of nominal indexation declines with real idiosyncratic volatility and the impact of an inflation shock decreases with nominal indexation. Using firm-level data from Canada we find that both predictions are supported by the data.
Tommaso Monacelli, Vincenzo Quadrini & Antonella Trigari
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Abstract: We study the importance of financial markets for (un)employment fluctuations in a model with matching frictions where firms borrow under limited enforcement. Borrowing affects employment through a `debt bargaining channel': higher debt improves the bargaining position of employers with workers and increases the incentive to hire. We estimate the model structurally and find that the debt bargaining channel accounts for about 30 percent of unemployment fluctuations. We find empirical support for the channel at the micro level using firm level data from Compustat.Â
Vincenzo Quadrini, Qi Sun, Junjie Xia & Ting Zeng
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Abstract: We study the properties of individual wealth growth and mobility in China using the China Household Finance Survey. We find that capital gains is the most important factor in generating wealth mobility while individual savings play a minor role. The second finding is that housing wealth is important for wealth mobility due to the high share of housing in household portfolios and the large cross-sectional dispersion in housing capital gains. The third finding is that wealth mobility increases with households' debt. To capture these features of the Chinese economy we construct a general equilibrium model where households choose three types of assets: housing, stock market investment and risk-free bonds (or debt when negative). We then use the calibrated model to explore the consequences of financial development and policies on wealth distribution and mobility.
Wukuang Cun, Vincenzo Quadrini, Qi Sun & Junjie Xia
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Abstract: We use Chinese manufacturing data to show that upstream manufacturing industries received higher credit during the monetary expansion of 2005-2011. However, the higher credit received by upstream industries did not generate a similar increase in `trade lending' to downstream industries, which limited the transmission of the credit expansion to the whole manufacturing sector. We develop a model that formalizes some of the key features of the Chinese economy and show why a credit expansion tilted toward the upstream sector may not fully cascade to the whole economy.